If the borrower passes away and the heirs of the estate do not sell the home or pay the mortgage, the lender will foreclose.
If the borrower fails to pay property taxes, the lender may help by supplying funds for a time but may eventually foreclose.
If the borrower fails to keep the home insured, the lender may decide to foreclose.
If the borrower fails to keep the home properly maintained over time, the lender may foreclose.
All of the instances discussed above make the mortgage become “due and payable”. That is, it moves from the state in which it originated, in which there were no payments due, to a state where it must be repaid, including all interest accrued during the life of the loan. If payment is not made, the lender will move forward with foreclosure proceedings.
The good news is that it is not difficult to avoid foreclosure with a reverse mortgage. Even if the foreclosure process has begun, there is help available. In many cases, simply contacting the loan servicer (the lender who holds the note) and discussing the situation can provide a way to avoid foreclosure. A HUD-approved counseling agent can also listen to your situation and provide you with options.
You can find a list of qualifying HUD-approved counselors here.
There are many things that can be done to avoid foreclosure, but your loan servicer is likely to do one of two things if you have an adjustable rate reverse mortgage and are receiving a line of credit or monthly payments. One of those is to create a lifetime expectancy set aside, or LESA. This is a fund set aside for the purpose of paying things like homeowner association fees, taxes, and insurance, and is funded (by you) at the time of closing.
Another option that might be considered is to withhold funds from your ongoing disbursements. For instance, if you regularly receive $1,500 per month from the lender, and the costs of your homeowner’s insurance and taxes come to $500 per month when spread across the course of a year, the lender may withhold $500 and only disburse $1,000.
How Does the Reverse Mortgage Foreclosure Process Work?
The reverse mortgage foreclosure process is actually relatively simple. As soon as the borrower defaults, whether through death, the sale of the home, or the home no longer being their primary residence, the lender will send what is called a “due and payable” letter to the address.
This letter tells you several important things. First, it is your first notification that the entire loan and all interest accrued are now due and must be paid. Second, the letter will include financial information, such as:
The loan balance
Various methods to repay the loan
How long you have to respond to the letter
Steps to follow to avoid moving forward with foreclosure
In some cases, the borrower will be able to get current on the loan by simply remedying the issues that triggered the due and payable notice. For instance, obtaining homeowner’s insurance, or paying back taxes, could be enough to get things back to normal. The first and most important step is to communicate with the lender so that they know you are not simply trying to walk away from the home.
However, if the property was sold, the owner permanently moved out, or the owner passed away, then getting current is not an option.
If you or your heirs want to keep the property, then paying the debt or 95% of the property’s appraised value (whichever is less) is the only way forward. You can pay this in a number of ways, including the sale of other estate assets in the case of the owner’s passing away.
You can also pay the mortgage balance by selling the property and using the funds to repay the lender. Note that because reverse mortgage loans are “non-recourse” loans, you are not responsible for paying the difference between the balance of the loan and the home’s sale price if the home does not bring in enough to completely repay the loan.
You also have the benefit of potentially earning a bit of money here. If the home sells for more than the remaining balance on the loan, then the extra goes to the estate, not to the lender.
In most situations, lenders will extend an initial 180-day period to repay the loan. Most lenders will also agree to a maximum of two 90-day extensions, meaning that you could have up to a full year to repay the loan. This is important because it can take some time for a home to sell, even in an up real estate market. Of course, as long as the loan remains unpaid, interest continues to accrue, meaning that your payoff amount gets higher. In addition, some lenders have shorter windows, so it is important to discuss this as soon as possible.
If there is no response to the due and payable letter, or if the property does not sell within the allotted amount of time, the lender will push forward with the foreclosure and, eventually, the owner or their heirs will lose all interest in the home. Once foreclosure occurs, the home is no longer the property of the original owner or the estate and becomes the property of the lender.
Recourse Loans vs. Non-recourse Loans
As mentioned above, reverse mortgages are non-recourse loans. What does that mean, though? How do they compare to recourse loans?
According to the IRS, “In general, a recourse debt (loans) allows lenders to collect what is owed for the debt even after they’ve taken collateral (home, credit cards). Lenders have the right to garnish wages or levy accounts in order to collect what is owed.
A non-recourse loan does not allow the lender to pursue anything other than the collateral. For example, if a borrower defaults on a non recourse home loan, the bank can only foreclose on the home. The bank generally cannot take further legal action to collect the money owed on the debt.”
The IRS notes that what constitutes a recourse and non-recourse loan can vary from state to state. However, all FHA-backed reverse mortgages are non-recourse loans, meaning the lender cannot come after you or your family for the total amount of the debt if you default. Note that most reverse mortgages are non recourse, but not all of them. Look for a specific non recourse clause in the mortgage contract to verify.
What If You Inherit a Reverse Mortgage-Funded Property in Foreclosure?
It is important to note that all reverse mortgages become due and payable on the owner’s death, although there are mitigating circumstances that we will explore in a later section. For now, we will keep things simple.
When you pass on, the reverse mortgage on your home becomes due. This means that, while you can leave your home to your heirs through your estate, they may not be able to benefit from it is they do not take immediate action.
Some heirs may be under the impression that they do not need to inform the lender of the owner’s death, thus keeping the reverse mortgage in place and avoiding the need to repay it, at least for the time being. In some cases, this may simply be because the death of the owner is a difficult time, and one less thing to worry about seems like a good situation.
The problem is that lenders actively monitor death records for all of their reverse mortgage clients. Failing to notify the lender does nothing in most cases, other than trigger the automatic due and payable letter that is sent at the time of the owner’s death. Deadlines for paying the loan balance are usually based on the date of the owner’s death, not the date that the heir or estate executor made the lender aware of the death.
If you have inherited a property secured with a reverse mortgage after the owner passed on, you will receive a due and payable letter very shortly after the death. This is normal and is simply a notification that the loan is now due.
As the new owner, you have several options. The first is to pay the mortgage out of your own funds. However, this could be a significant amount of money, and you may not have such deep pockets. In this case, you could choose to sell the property and pay the loan out of the proceeds. Again, if the home sells for less than the balance on the mortgage, the lender cannot come after you for the remaining amount. However, if the home sells for more than the balance, that overage belongs to you.
It may be your desire not to deal with the situation at all, in which case you can let the lender handle the sale and simply wash your hands of the situation. Your path forward will depend on what you want to do with the property. What is most important is that you stay in communication the lender to ensure that they know your intentions.